JOURNAL OF PUBLIC ECONOMICS ELSEVIER Journal of Public Economics 59 (1996) 1-15 Competition and regulation in the taxi industry Robert D. Cairns a, Catherine Liston-Heyes b aDepartment of Economics, McGill University, Montreal, Quebec H3A 2T7, Canada bScho01 of Management, Royal Holloway College, University of London, London, UK Received March 1993; final version received September 1994 Abstract A simple model of the taxi industry suggests that deregulation of fares and entry may not be optimal. The conditions of competition do not hold in the industry, even approximately. A model of search, where drivers and riders search for each other, is presented for the cruising-taxi market. This indicates that equilibrium of a de- regulated industry does not exist. Price regulation is essential, and entry regulation may be useful. In addition, viewing the medallion as a bond for appropriate performance provides another possible rationale for regulation. Keywords: Regulation; Bonding; Transportation; Taxis JEL classification: 022; 612; 613; 615 I. Introduction The taxi market in large cities has been one of the prototypical examples used by economists of the inefficiency of governmental regulation and of the power of the market to regulate an industry so as to maximize social welfare. In the more specialized literature of transportation economics, however, a long-standing debate has raged over whether the industry ought or needs to be regulated by civic authority. 1 In some US cities in the 1980s Tullock (1975), Coffman (1977) and Williams (1980) have argued in favour of deregulation. Deregulation of entry while retaining regulated fares, if sometimes not actually advocated, has at least been implicit in the work of Douglas (1972), Beesley (1973, 1979), De Vany (1975), Abe and Brush (1976) and Manski and Wright (1976). Shrieber (1975, 1977, 1981), Schroeter (1983), Gallick and Sisk (1987) and Teal and Berglund (1987) have argued for fare and entry regulation. 0047-2727/96/$15.00 © 1996 Elsevier Science S.A. All rights reserved SSD1 0047-2727(94)01495-7